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FDIC Chief: Most Banks Will Survive Credit Crunch

Poor lending and underwriting caused two more banks in the U.S. to close over the weekend, yet regulators and the Federal Deposit Insurance Corporation, or FDIC, are helping banks remain stable as the economy struggles. Sheila Bair,the chair of FDIC, explains the process.

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    Two more banks in the United States closed this weekend, as the effects of the housing and credit crunch continue rippling through the financial system.

    The First National Bank of Nevada and the First Heritage Bank of California became the sixth and seventh banks to go under this year.

    The Federal Deposit Insurance Corporation, or FDIC, which regulates commercial banks and guarantees deposits, sold the banks' deposits to Mutual of Omaha Bank.

    Now, those failures come after the demise of IndyMac Bank in California, which earlier this month became the largest American lender to fail in more than two decades.

    Sheila Bair is the chair of the FDIC, and she joins me now.

    Sheila Bair, thank you very much for being here.

  • SHEILA BAIR, Chairman, Federal Deposit Insurance Corporation:

    A pleasure. Thank you.


    What was behind the failure of these two banks?


    Well, primarily some very unwise lending. They had some very poorly underwritten loans in both residential mortgages, as well as residential construction development. It was primarily poor lending, poor underwriting.


    Now, their deposits were acquired by this other bank, the Mutual of Omaha Bank.


    That's right.


    What role did your agency, the FDIC, play in this coming about?


    It is a confusing process. We actually don't charter banks. In this case, the chartering authority was the Office of the Comptroller of the Currency. And when it became apparent to the OCC that these banks were no longer viable, they decided to pull the charter, close the bank, and turn it over to us as receiver.

    We have advanced notice when a primary regulator decides to do that. We will typically work with them days, sometimes weeks, if we have the time, in advance, trying to get at least the deposits on a marketing system that we have to see if other banks would like to acquire the deposits.

    That's our preferred course of action. It is a smoother process for depositors if the bank has to be closed to just have their deposits switched over to another healthier institution.